DFS Furniture plc

Good morning, everyone, and welcome to the DFS Group 2026 Interim Results presentation. I'm Tim Stacey, Group CEO, and I'm here with Marie Wall, our Interim CFO, and together we will update you on our first-half performance, provide a strategic update, and also a future outlook. Now, there are three key themes that we'll bring out in the presentation today. Firstly, on the financials, Marie will talk to the good result we've achieved in half one and also update you on our FY26 outlook. Second, I'll talk about how we've delivered on our strategy, which has supported our improved performance and delivered on our plan to reduce our debt. And third, in terms of future growth, I see significant growth potential for the business across the medium term. That's revenue and profit growth, which will deliver high levels of free cash flow. So onto our half one performance. In what remains a broadly flat upholstery market, we grew group order intake by 2.3% year on year with both of our retail brands in growth. Gross margin progression continued up 110 basis points year on year, marking our fourth consecutive year of improvement. Combined with discipline cost control, this delivered a significant uplift in profitability. Underlying PBT increased to 31 million, up nearly 14 million year-on-year, demonstrating the operational gearing in our business model. And we achieved the 5% PBT margin we've been targeting outwith any market recovery. Importantly, we also strengthened the balance sheet. Strong cash generation enabled substantial debt reduction, bringing leverage down to 0.8 times, now just within our target range of 0.5 to one times. This enhanced financial flexibility positions us very well for future growth and also allows us to reintroduce a dividend, which Marie will talk to later in the presentation. Looking ahead, we see significant growth potential over the medium term. Our vertically integrated platform, exclusive brand partnerships, scale advantages and logistics capabilities give us confidence in our ability to grow profit. And with a revenue to profit drop through of around 40%, the business is well positioned to benefit from any future recovery in consumer confidence and market demand. We therefore remain confident in delivering our medium term targets of 1.4 billion of revenue and 8% PBT margin. In summary, we've been focused on executing our strategy. We've delivered profit growth, reduced leverage into our target range, and positioned the group strongly for the future, despite what's clearly a challenging external backdrop. Just briefly, turning to some key highlights for the first half. First, our non-upholstery home offer continues to build real momentum. Increased marketing, expanded product ranges and selective showroom investments are driving customer engagement and conversion, leading to a 14% year-on-year order intake growth. Secondly, exclusive brand participation reached 42% of DFS's sales mix. This is an important strategic lever for the group, strengthening our differentiation and enhancing our customer proposition with ranges that customers can't find elsewhere. And finally, our approach to customer satisfaction remains a core differentiator. Our DFS established customer net promoter scores improved by 10 percentage points to record levels. This reflects the hard work of our colleagues across the group and the continued focus on product and service quality across the end-to-end customer journey. And I'd just like to thank all of our colleagues for their incredible work in the half. Look, in summary, we've accelerated growth in home, we've leveraged our exclusive brands further, and we've increased our customer satisfaction to record levels. I'll now hand over to Marie, who will take you through the financials for the first half.

Hi, thank you, Tim, and good morning, everyone. It's a pleasure to be here today. I'm going to begin by walking you through our key financial headlines. We achieved strong revenue growth of 8.6% year on year, and this was delivered through a combination of order intake growth over the half and a larger opening order bank coming into the year, which drove a higher level of deliveries in the first quarter. Underlying profit before tax and brand amortization increased by 13.9 million to 30.9 million. And our underlying basic earnings per share increased by 4.5 pence or 85% to 9.8 pence. The strong profit performance is the result of higher revenues supported by 110 basis points of gross margin expansion and lower interest charges resulting from disciplined cash management and lower levels of bank debt. We continued to reduce our absolute debt levels to build balance sheet resilience, and ended the period with net bank debt of 60.6 million, down 56.1 million year on year, and down by 104 million since full year 24. This was achieved through the improved profit performance, the successful execution of our cost programme and our disciplined approach to cash management. I am pleased that our leverage position has continued to improve and with our reported leverage now at 0.8 times, that's one times after adjusting for the phasing of working capital. This is just at the top of our target leverage range of 0.5x to 1x and marks a significant improvement on one year ago. In summary, the Group's performance in the first half of FY26 built on the momentum we achieved in FY25 and marked another strong period of profit growth, free cash flow generation and, importantly, substantial deleverage. So moving on to our sales performance and starting with order intake. Following a slower than envisaged start to the period due to exceptionally hot weather in July and August, order intake performance strengthened over our first half. For the period as a whole, the group achieved 2.3% year-on-year order intake growth in a market that was broadly flat year-on-year. Both our retail brands grew their order intake in the period, reflecting the success of our commercial initiatives in driving volume growth in both brands. In DFS, exclusive brands continue to perform strongly and reach record levels. In addition, sofas with a high number of technology components, such as wireless chargers, wine fridges, our patented heated seats and our sound systems, help contribute to higher average order values. As Tim mentioned, our home non-upholstery category also performed strongly in the period, up 14% year on year. This benefited from the recent marketing investment and the rollout of some of our exclusive upholstery brand partnerships into our home ranges. Overall, DFS achieved order intake growth of 2%. In Sophology, the range and price changes made in the previous year, along with our continued focus on range optimisation, has meant the proposition continues to resonate well with the consumer, and this underpinned higher conversion rates, driving the brand's 3.4% year-on-year order intake growth. Gross sales, which are reported on the delivery of customer orders, increased 8.7% year on year. This is higher than the reported order intake growth of 2.3%. Now, as I mentioned earlier, this is due to the elevated opening order bank relative to the bank that we entered the year with in the previous year. Revenue, which is at the bottom of the table, is reported after deducting VAT, the cost of providing warranty products, and interest-free credit. It grew at a similar rate to gross sales, with the cost benefit from Sonja rate reductions reinvested into strengthening the commercial proposition. So in summary, we achieved a strong top-line performance in a subdued market through our ongoing focus on improving our market-leading proposition. Moving on to gross margin. Following three consecutive years of gross margin rate improvement, the group delivered a further 110 basis points of gross margin expansion in the half, making strong progress towards our 58% margin goal, supported by improved product margins, stronger US dollar GBP exchange rates, and a return towards historic average levels on freight rates and Sonia rates. In absolute terms, gross profit increased 30 million year on year to 316.3 million. So running from left to right on the chart and taking each building block in turn, the strong revenue performance translated into an incremental 24 million of gross margin in the half. Product margins increased 30 basis points, or 1.4 million, through a number of initiatives which we initially kicked off under our Cost to Operate programme. Now these include redistributing products across our supplier base to optimise cost of goods and quality, ongoing product re-engineering and reviewing opportunities to better leverage the group scale. The latter has been enabled by bringing together commercial buying teams of each brand under one leader. Freight rates gradually reduced through the first half, returning back towards longer term historic average levels by the end of the period. This drove a 2.7 million or a 50 basis point year on year rate improvement, which was ahead of our initial expectations. It is also worth noting that every $1,000 movement in freight rate per container impacts our annual freight costs by around seven to eight million a year. And finally, foreign exchange. We benefited from improved US dollar rates applied to our Far East products, and you'll recall that every one cent movement equates to just over a million pounds of annualised cost impact. The average rate paid through the period was 3 cents favourable year on year, resulting in a 1.9 million or 30 basis point rate benefit. Now this was in line with our expectations. So in summary, another strong period of gross margin progression and we have made good progress towards our stated 58% target. So let's take a moment to look at operating costs. I'd like to start by reminding you of the target we set at the end of FY23, which was to deliver 50 million of annualised cost savings by the end of FY26. As you may recall, by the end of FY25, we had delivered 53 million against this target, which was one full year ahead of our plan. That early delivery has reset our cost base and demonstrated the strength of our cost discipline. Importantly, those savings are now embedded in the business and are building and helping to offset inflationary pressures broadly as we expected. Against that structurally leaner cost base, our operating costs, including depreciation and interest charges, increased 16 million year on year to 285.4 million. Now, this increase is largely explained by three factors. Firstly, volume-related costs increased 6 million, linked to the higher sales achieved in the period. Secondly, inflation added a further 6 million, or around 2%. And this was primarily driven by wage increases and the impact of the April 2025 national insurance changes. And finally, we invested 7.4 million in marketing to drive awareness of our home proposition, as well as returning Sophology to TV advertising with the launch of its new So Fussy campaign. And this is resonating really well with our consumer base. Initiatives launched last year through our Cost to Operate programme have continued to provide savings in the current year, helping to partially mitigate cost inflation. For example, In our customer service operations, we are transitioning to service both retail brands through one group function, enabling us to leverage standardised processes and using two new technology to drive efficiency and improve the customer experience. Debt interest and depreciation charges fell by 3.4 million year on year, And the majority of this, or around 2.5 million of the reduction, relates to interest savings, resulting both from the high levels of free cash flow generation over the last year, which reduced absolute debt levels, and, to a lesser extent, from a lower average funding cost. In addition, the group has taken a very disciplined approach to capital investment over the last three years, with absolute levels of investment being lower than historical levels, and this has driven a lower depreciation charge in the half. So looking forward to the second half, we do not expect the year-on-year operating cost increases to be as significant as in the first half, as we cycle the inflationary headwinds experienced in Q4 last year and we annualise the marketing investment increases we made. We are mindful of the potential impact of the conflict in the Middle East and expect our exposure to higher levels of inflation to be limited in FY26 and this is because we are hedged across energy costs and our shipping agreements. Now this is something that we are obviously keeping a close eye on and we will seek to minimise any potential longer term impacts as we have done before. Turning to cash flow and debt. Building on a strong cash performance in FY25, the group again generated a high level of free cash flow in the first half. In this period, 46.4 million of free cash flow was generated. We have maintained capital expenditure at relatively low levels compared to long-term average levels for the group as we focused on debt reduction, limiting growth investment to capital light and short payback growth projects. As our financial position has improved, in Halfhorn FY26 we also invested in some additional growth opportunities. Now these include a new Sophology showroom in Carlisle and a mezzanine investment in DFS's Stockton showroom to expand the upholstery ranges on display and create dedicated space for expanding our home offer. We continue to invest in data, AI and technology to both enhance the customer experience across the buying journey and to improve the quality and efficiency of our supporting operations. We expect capital investment for the full year to be in the range of 24 to 28 million as previously guided. Interest costs were lower year on year due to the lower average net bank debt levels through the period and to a lesser extent benefiting from a lower average cost of financing resulting from Sonia rate reductions and a lower leverage premium on our RCF facility. Corporation tax payments were higher year on year, and this is due to the benefit in half one full year 25 of recovering historical overpayments. Lease payments were also 7.3 million lower year on year, reflecting a timing difference on rent payments, which will reverse as we go into the second half. Working capital inflows in the period totaled 17.7 million. This inflow is driven by seasonal flows associated with the large volume of guaranteed for Christmas orders. And this is quite typical. Following typical trends, we would expect this to unwind by the year end. It is worth noting that the working capital inflow was higher in the first half of FY25 and this was driven by a large increase in the level of customer deposits held following the significant improvement we saw in trading performance towards the end of the first half last year. So turning to debt levels. Over the last 18 months we have focused on building a stronger and more resilient balance sheet. and we have reduced absolute debt levels by £104 million to £60.6 million at the end of half one. This debt reduction has been achieved through the improved profit performance, working capital inflows resulting from the improved trading and our disciplined approach to cash management. Pleasingly, bank leverage is now at 0.8 times or one times after adjusting for working capital phasing. And this means that we are now at the top of our target 0.5 to 1 times leverage range, making good progress towards our plan to operate within and towards the lower end of the range. I'll talk to you about capital allocation shortly. So I'm now going to take you briefly through how we see the macro outlook to provide a little bit of context before I discuss the outlook for this financial year and dividends. Overall, the key market drivers applicable to our sector remain broadly stable. Starting with consumer confidence on the left-hand side of the chart, we know there's a strong correlation between consumer confidence and market demand for upholstered furniture. The appetite for major purchases has been relatively steady over the last 12 months. However, they remain below pre-pandemic levels and confidence is not yet at a level that would support a meaningful step up in discretionary spend. Of course, the recent events in the Middle East are not reflected in this data set and we're also mindful that unemployment has edged upwards towards 5.2% towards the end of the calendar year. This may further weigh on sentiment in the near term. Moving to the middle chart, real household disposable income is growing and forecast to continue to grow, but at a slower pace than we have seen in previous OBR forecasts. Consumer balance sheets are stronger and savings rates remain above pre-pandemic averages. The key point here is that income growth is not yet fully translating into spending growth, particularly in big ticket categories like ours. So finally, on the right-hand side, property transactions. Transactions typically drive around 20% of upholstery purchases, and as you can see from the chart, these have been relatively volatile in recent months given the uncertain macro environment. Whilst the growth rate has slowed recently, it's largely been in positive year-on-year territory for almost two years now. So in summary, whilst the structural drivers are broadly stable, they are not signalling a near-term inflection point and the potential consequences of what is happening in the Middle East are hard to determine as I stand here today. So we continue to plan on the basis of a relatively flat and subdued market backdrop and we're focusing on what we can uniquely control. So bringing that together for the outlook for this year, Since the half year, we have seen some softening of football trends, linked firstly to adverse weather conditions over the period, and we are aware that consumer confidence remains really delicately balanced. We will remain focused on executing our strategy, and in combination with our disciplined approach to gross margin and cost management, we are comfortable with reiterating our uplifted profit guidance in the range of 43 to 50 million. Now, that does, of course, assume no material supply-driven disruption, which could impact the delivery of customer orders in the full year, resulting from the current geopolitical events. And from the cash flow perspective, as I mentioned earlier, we don't expect to see a reversal of the half one working capital inflow as a result of typical seasonal trends, and the rent timing benefit we had in half one will also reverse in half two. Our full year cash capex is as previously guided at 24 to 28 million and that includes some further growth related investments in our second half. Looking forward, our capital allocation priorities remain unchanged. We continue to focus on improving balance sheet resilience, reducing debt down to operate at the bottom of our target range of 0.5 times and to invest to maintain the group's asset base and support future growth. and importantly to provide sustainable shareholder returns. So as Tim alluded to earlier, in light of our improved position and reiterated guidance for the full year, the board has approved the payment of an interim dividend of one pence per share. In determining the appropriate size of the dividend, we took into account that demand drivers remain delicately balanced and that the group is not immune to geopolitical events and their potential impact on the macro environment. We believe that returning to the dividend register in a measured way is the right course of action to balance investment and growth, continually leveraging towards the lower end of our target range and support sustainable shareholder returns. And with that, I will now hand back over to Tim.

All right, thanks, Marie. I'd like to take a step back and focus on the reasons why we've delivered this performance in the first half. Now, we have been focused relentlessly on executing our strategy and controlling the things that we can control, carrying forward the momentum we had from the last financial year. And the financial outcome reflects the progress we've made in three key areas, which are leveraging our scale and vertical integration, utilizing data and technology, and harnessing our unique people and culture to drive performance. Now, these three enablers are increasingly interconnected, and I'll take you through each one of them now. In terms of leveraging our scale, now scale is a fundamental competitive advantage for our group. We're the clear market leader with around 39% value share of the upholstery market and we operate at a scale that is unmatched in UK upholstery. This leadership gives us structural advantages and it's difficult to replicate. It enables us to secure exclusive brand partnerships, maintain strong relationships with our supplier partners, and operate highly efficient shared functions across design, manufacture, retail, logistics, and servicing. In DFS, exclusive brands remain central to our proposition, now representing over 42% of our sales mix. Our collaborations with brands such as French Connection, Joules, Ted Baker, and Country Living allow us to create differentiated ranges that customers can't find elsewhere. More recently, we've enhanced our ranges with technology-led innovation. Our Cinesound range and Soundwave by my good friend Shaquille O'Neal bring Bluetooth connectivity, immersive sound, and integrated features directly into the sofas. We've also recently launched a super exciting collaboration with Amanda Holden, bringing bold statement designs to our customers' homes. And as you can see here on the far right-hand side of the slide. In Sophology, the new SoFussy campaign featured Craig Revel Hallward, which has resonated strongly with customers. We've also launched new Lazy Boy ranges into Sophology, the Atlanta and Colorado, carefully selected to complement the existing offer and drive incremental growth. In addition, Sophology's post-Christmas sale successfully drove strong order intake growth. Our scale also extends into our home offer. Partnerships with House Beautiful and Ted Baker, alongside our in-house brands, supported 14% growth in home order intake, as I mentioned earlier. In addition, mezzanine expansions are enhancing the showroom footprint for home, together with marketing driving awareness. In terms of vertical integration, our vertically integrated model gives us end-to-end control from design and sourcing through to logistics and final mile delivery and customer service. This end-to-end control drives several benefits. Firstly, design led value creation. We control product development, which means we can engineer margin and cost discipline and quality into the product ranges from the outset. Secondly, Our in-house creative engine allows us to produce marketing assets faster and more cost-effectively, improving speed to market and reducing external spend. Next, as the largest sofa manufacturer in the UK, and also through the Sofa Delivery Company, operating as the UK's leading two-person sofa delivery service, we can provide quality, consistency and cost leverage, and this underpins our strong Net Promoter Score performance. I'm pleased to be able to say that the sofa delivery company has now signed contracts with two third-party retailers. This creates incremental revenue, utilising the spare capacity within our existing logistics infrastructure. And lastly, across customer service, consolidating specialist teams while retaining separate brand identities has enabled us to leverage expertise, improve consistency and drive efficiencies. Moving on to data and technology, they're clearly increasingly central as to how we differentiate and drive efficiency across our group. We're building capability within our proprietary platforms to enhance both the customer experience and our operational performance. And we're also embedding technology directly into our product ranges, whether that's the integrated sound systems, wireless charging, enhancing functionality, creating clear points of differentiation and supporting higher average order values. We're also using AI to tailor the online journey. New customers to our websites will see more inspirational, research-led content, while returning customers are shown previously viewed products and relevant recommendations. This is improving engagement and conversion while strengthening brand perception. We've also further developed our websites to provide our customers with a more brand-enhancing omnichannel experience. For example, in Sophology, tools such as the showroom range locator and complete at-home functionality are enhancing flexibility and driving conversion. Interest-free credit remains a core part of the upholstery market, and we've introduced a new soft-search online credit checker, which allows customers to assess their eligibility from the comfort of their own home before visiting a showroom. This improves their confidence, it reduces friction in the buying journey, and drives efficiency for our sales colleagues in store. Finally, AI now supports written communications, intelligent call routing, and call analysis in our customer service function. This results in faster resolutions, improved service quality, and better targeted colleague training. Now taken together, these initiatives are driving higher e-commerce MPS, improving productivity, and enabling us to offer a truly channel agnostic customer experience. So onto our culture and our people. Our culture underpins everything we do. And we've worked really hard in recent years to integrate group functions while preserving the distinct retail branded identities. That cultural evolution continues to unlock collaboration and performance and team spirit. Our leadership development programme has played a central role in shaping our enhanced group employee value proposition and this is launchers in half two this year. Our next leadership cohort is already underway. Inclusion remains a priority. With the launch of the new Mankind Network, we now have seven colleague networks, each sponsored by senior leadership, and that supports diversity, well-being and innovation across the group. Sustainability is also embedded deep within our culture, and we are progressing our property decarbonisation agenda to meet our SBTI target of a 54.6% reduction in Scope 1 and 2 emissions by 2032. Now this slide kind of brings it all together in terms of the financial outcomes of our strategy execution in the first half, and it's a pretty simple equation. Top line growth combined with structural gross margin improvement and a leaner cost base is translating into meaningful profit progression. And this is demonstrating the operational leverage within our business model. It gives us confidence in not only the resilience of our business today, but also the earnings potential in the future no matter what the macro brings. Looking further ahead, earlier in the presentation, Marie provided some context around the market drivers being fairly subdued. But what I want to do now is to take you through what we can control. And we see three clear medium-term opportunities to deliver sustainable profit growth out with market recovery. Firstly, in our core upholstery business. We continue to focus relentlessly on new product innovation, investing in technology-enabled products, exclusive brands, etc. We'll also invest in our showroom space through new showrooms and refits. At the same time, we're operating with a structurally improved cost base, and our vertically integrated operating model allows us to capture value across the entire supply chain. Our core upholstery business is leaner, more efficient and well positioned to translate any incremental sales into high profit conversion. Secondly, the home market opportunity. Beyond core upholstery, we see a significant opportunity in the broader home market. The total addressable market here is 5 billion. And we are initially focusing on 3 billion beds and mattress segment and are leveraging our exclusive brand partnerships, creating new products. We've increased our marketing investment. We're expanding our showroom space through mezzanines and DFS and extending ranges online to drive growth. This is a natural adjacency for us, and using our existing infrastructure and the DFS brand strength in all of our assets, we remain very confident in delivering 100 million of incremental revenue over the medium term. Finally, leveraging our platforms. Now, the Sofa Delivery Company is a unique and scalable asset within our group. It already supports brilliantly our retail brands with market-leading customer service levels. Now we are increasingly utilising spare capacity within our model to secure third-party contracts. This creates a capital-light, scalable earnings stream, generating incremental revenue and profit through third-party opportunities without significant additional investment. And underpinning all of this is what happens in terms of the upholstery market recovery, which is still over 20% below pre-pandemic levels. Once that recovery comes, that will provide an additional tailwind, but we're not waiting for that. There's things that we can control. Now, given our structurally improved gross margins, our operational leverage, and 40% drop through, any improvement in demand will translate into meaningful profit and cash growth. So just to summarise, we have three clear medium-term opportunities under our control. Growing our core upholstery, growing our home market and leveraging our platforms. And that's in addition to any market recovery. This gives us a lot of confidence in the future, progressing from around a 5% PBT margin today to an 8% PBT margin in the medium term. So in summary and standing back, in half one, we're really pleased with half one's performance. We achieved good order intake growth on the back of a really strong comparative last year, growth across both retail brands, improving our gross margins for the fourth consecutive year, generated strong cash flow with over 100 million over the last 18 months, reducing our leverage back into our target range. We're now operating from a position of real increased financial strength. And of course the market remains subdued and the macro is uncertain. But we have multiple levers in our control from continued self-help and lots of experience of dealing with previous crisis. We know how to manage this business. We can improve our upholstery proposition and grow there. We've got a great opportunity in the home market and we can leverage some of the platforms that we've been building over the last few years. And over the medium term, as the core upholstery market recovers, we are structurally better positioned than ever before to convert that revenue into high levels of profit and cash growth. So we therefore remain confident in delivering our full year guidance and also achieving our medium term targets of 1.4 billion of revenue and 8% PVT margin. Now, before I close, I'd just like to thank Marie for her outstanding contribution as the Interim Chief Financial Officer. She's provided strong leadership, stability, great support through this important phase for our group. I'm incredibly grateful for your support. Thank you. We also very much look forward, I know she's watching, to welcoming Dominique Highfield as our new Chief Financial Officer in May. And Dominique joins us at a very exciting and challenging time. And I'm sure she'll play a key role as we continue to strengthen our business and deliver on our medium term ambitions. Last but by no means least, I'd like to thank every single one of our colleagues for their relentless dedication and focus on customers and looking after each other. the culture we've created in this business, the resilience we have and the spirit we have will see us through whatever. So big thank you. That concludes our presentation. And I'll now invite Marie back up so we can handle any Q&A.

Morning, Jonathan Pritchard of Peel Hunt. Two, if I may. Firstly, on home, could you just talk us through the P&L characteristics there, please? Gross margin and where it ends up in operating margin terms. And that's the first. And then I guess the big one, just put a bit more skin on the bones on current trading, please. Is it footfall? Is it online? Is it trading down? Seems that the last sort of, well, 10 weeks have been a bit tricky. So just talk us through the shape and what's been going on.

Yeah, thanks, Jonathan. I think on home, so gross margins are slightly lower than upholstery margins. They're probably in the mid to high 40s for particularly beds and mattresses and dining. So we've grown that over the last few years by bringing more in-house and using some of our exclusive products. That's the first thing. We then have the variable delivery costs and we have the variable marketing costs. So when you get down to contribution, though, it's very profit accretive because we're using existing assets in terms of our showrooms, our websites, our people. So although the gross margin is lower from a profitability point of view, it adds obviously cash profit and helps there. In terms of current trading. Talked a lot about this. So January, you've seen the half one results. Footfall was broadly flat. The market was pretty flat. Average order values were up in both brands. Volume was up slightly in both brands. January followed a very similar pattern. Footfall not massively different. But what we started seeing in February is actually stepping back up the funnel. So a bit less searches on Google, less traffic going into the websites and less footfall. And we thought we'd put that down to the weather. What we don't do is extrapolate short-term trends. This business does oscillate having been here 15 years. So usually what tends to happen is if you get a period of bad weather, you get that back at some point. I think what we've now got into is maybe some impact of consumer confidence and what's happening from a Middle East point of view. So we've just seen a bit of a softening of footfall. Average order value is still up. Conversion is still strong for those who are coming in. There's just fewer people around at this moment in time. That said, we have got strong proposition going into Easter, which is earlier this year, which is good for us. And having done all the numbers, albeit the order intake might be slightly lower this year and revenue might be slightly lower, we reiterated our guidance in terms of profit, given the margin and the cost control that we have. Hopefully that answers the question.

Thanks. It's Anne Critchlow from Berenberg. I've got a couple of questions, please. So first of all, on marketing, I'm interested to know how much SEO and performance marketing sort of takes up of your marketing budget, but also whether you're beginning to transfer some of that SEO into GEO, so sort of making the website scrapable for AI. to present answers to questions that customers are asking in AI sites. And then secondly, if you could just remind us, please, on store numbers, so number of openings, closures, refits in each brand this year, and maybe also what you're thinking about for next year.

Yep. You're testing my GEO. That's a good one. Very generative. So we're doing a lot of work on that because clearly what's happened, as you see, Google changes its algorithms quite often. And one of the big algorithm changes is how well embedded or well searched your websites are from an AI perspective. So I think we've got AI looking at our website in that way. We're trying to adapt all the time. So we've got in-house teams who look at SEO and also experts who are then thinking about the implications of AI onto our website. At this moment in time, the marketing money hasn't massively shifted. We spend, and we don't massively talk about this from a competitive point of view, but broadly 50% of our marketing is spent in the digital space. social SEO search, but increasingly AI is coming in and thinking about how do we integrate that into our websites, but also thinking about offsite and how that works for us as well. So we're very cognizant of that. We are working with some expert partners in it and continue to involve. It's a huge part of our business. Nearly 30% of our completion goes through the web channels. I hope that gives you a sense of what we're up to. In terms of store openings, we've had one new store opening for Sophology. We've got another one planned. We currently stand at the end of December, 57 Sophology stores. We still see growth towards 65, 70 over the coming years. We'll do that selectively in the right locations. We know exactly which cities to go to. Pinpointed that. It's just finding the right deals with the right landlords. In terms of refurbishments, Marie, a few planned happening right now?

Yeah, and we're spending quite a lot of time looking at that in terms of the returns on those as well. So they're going well. We get really nice uplifts when we do that, generally pay back within less than three years, two and a half, something like that.

And as we look forward into FY27, we're looking at one or two more sophology stores. We'll be looking at investing more in mezzanines and DFS. We'll be looking at doing some refurbs in both DFS and sophology. So our growth capex will go up slightly from where we are today. Not significantly, but I think we're in the 24 to 28 for this year. It might get towards 30 for next year. Morning, hi.

Hi, both. It's Hai here from UBS. Thank you for taking my questions. I have a couple, please. On the gross margin target of 58%, you are very close to that now. Do you see further upside from that 58% as you go ahead, or do you think the dynamic is that because home is becoming an increasing bigger part that will dilute it a little bit, and you stay there at 58 as the maximum level? And also in terms of the operating cost, second question, operating cost dynamic, how far are you hedged in terms of freight and energy? Typically, when do you renew these contracts?

Marie, you take the gross margin?

Yeah, so high on gross margin. We've had a little bit of structural support from that in the last year with the tailwinds that we've had. So we would expect to sort of stay around 58% going into full year 27. Home will be diluted, so that takes off about 10 basis points as we start to see that become an important part of our portfolio going forward. There may be a little bit more structural support if Bank of England base rates come down further, but I don't think anyone's anticipating that right now. And FX, it's anyone's guess where that goes. What we wouldn't look to do is try and drive that gross margin higher at the consequence of our customer proposition. So we'll always want to keep something in the tank. to keep that proposition as sharp as we would like and so I'd see 58% as a reasonable number to go for and with a little bit of dilution coming in from home because we don't expect that to structurally get higher.

And on operating costs, so just taking your point there, on energy costs, we're hedged on the variable cost of electricity out to March 27. In fact, we look at this all the time in terms of taking opportunities. So we're hedged on that, the variable cost of electricity. We don't use a huge amount of gas. That's part of our decarbonisation strategy. And over time, we're reducing energy. Gas boilers, we're taking gas out of everywhere. So we're kind of switching to electricity. So electricity is hedged. Obviously, there's a risk around fuel costs. So our self-delivery company has 200-odd vehicles using diesel. So there'll be a bit of a risk around pump prices. But in the grand scheme of our operating costs high, it's not a significant amount of money. So we've got other cost savings that we can apply against that.

Morning, Wayne Brown from Pamela Brum. You're very clear on your outlook on revenue and the prospects there. But if you can just talk about market share. maybe put into context of how the business has historically performed in good times, but more in times of uncertainty, how that market share has progressed. And do you potentially, if we are going into a period of greater uncertainty, maybe there's a quite a positive story to necessarily reflect on what market share could potentially do in the next 12 months to 24 months.

Yeah, so it's a really good question, Wayne. And I think If you follow this business for a long time, in periods of uncertainty, historically, the DFS group has always grown its market share. So if you went back to, we were just looking at this this morning, June 22, which was around the start of the cost of living crisis, the group had a share of around 36% as per the global data measure. I think we're now close to 39.40. So we've grown. That's not with necessarily adding more stores. That's about us growing our like for likes there. So there's a period there. If you went back further, post-COVID, we grew substantially from low 30s up towards 36. So we've got history of growing our market share in tough times. If the market does get tough, and who knows, we've got a lot of resilience in our business model. And actually, what I would say to everybody who are focused very much on the short term sometimes is, Compared to four years ago, we've got lower bank debt. Four years ago, we had 90 million. We're now at 60. We've got a higher market share. We've taken 60 million of cost out of the business on a structural basis. We've done all of the organizational change we need to do. Our gross margins are close to 58%. We've never been in a stronger financial position as we go into whatever we're in now. So I think we can be on the front foot. And I think we see it as an opportunity over the medium term to grow our share. It's harder for smaller businesses in our sector to cope with any downturn. So that tends to be, you know, we'll play to win in this type of market way, is the point.

Hi there, David Hughes from SureCap. A couple from me. Firstly, on the interest-free credit side of things, Are you seeing any change in kind of customer uptake on this? And in the case that we do see any kind of further base rate cuts across the year, would the strategy to be to further improve the IFC offer or would it be more around kind of taking the margin benefit of that? And then secondly, on the cost side of things, if we do get extended periods of elevated costs and that starts to come through, obviously you've already found quite a lot of cost savings. Is it the case that maybe the well of cost savings is running dry a little bit from that price and you'll be forced to kind of decide between margin and price increases?

Yeah, that's both good questions. So do you want to talk about IFC for a little bit?

So David, on IFC, we did see like a really modest increase in penetration, like really small as we went through the first half, particularly in DFS and also slightly longer tenure, but again, really small, like we're talking a couple of weeks. So that's part of where some of that room of investment has come back in terms of the Bank of England base rates. I think in terms of how we might use any further savings, should we start to see those going through, I think that will really depend actually in terms of what we're seeing in terms of the market dynamics. So we're going to have to play our own game on that rather than responding necessarily to what competition are doing, because there's a whole complexion of things that go into creating that proposition for the consumer.

Yeah. At this moment in time, we're not expecting base rates to come down much from where they are, but we keep a watching brief on that. But we want to strengthen the customer proposition. Well, the market's quite subdued, but we're not really seeing much change. Our assumption for next year is there's no change in base rates at this moment in time. In terms of cost, it's a really good question because we've had a really successful cost-to-operate programme, taking over £53 million out in two years, so one year ahead of plan. But that's now embedded in the culture, and so we're using data a lot across the whole business to identify areas just to get those marginal gains all the time. So we're always looking for cost savings, and I think you saw up there there's another over $3 million of cost savings, half one. It'll probably translate to $5 million, $6 million for this financial year. So we'll keep looking to do that. There's a whole bunch of projects going off, and I chair it, operate for less meeting, along with Marie, about really always looking at a cost base. I think there was, depending on what happens with the consumer will then dictate how we behave. And what I would say, Unfortunately for me, having been here a long time, I know which levers to pull. So we've had a lot of experience of what levers to pull as we go through the different crises, whether it's really looking at things like marketing costs, which you don't necessarily want to do for the long term, but you can do in the short term. Things like looking at all sorts of different investments where you really focus on the things that you have to invest in as opposed to what you would really like to do. So there are ways to manage that. But we need to keep our commercial proposition sharp. That's important.

Morning. Just sort of dwelling on sort of nicer things. Home's obviously been a good performance there. How much of a field do you get... of it being driven by new customers coming into the business or is it the existing customers cross-selling and really what has been the sort of drive? Has it been marketing-led or is it a combination of both really?

Good question. It's a combination of both, particularly where we have the product in store. It's obviously far easier to cross-sell to customers because they can physically see the product and it's a much easier conversion opportunity and cross-sell opportunity for our store colleagues who are super hungry for this. So in our showroom in Stockton, which is in the northeast, We've put a really strong home offering. You see quite a lot of cross-sell, more than you see new customers. So as we roll out the physical manifestations of home, we'll see a lot more cross-sell opportunity, point number one. The marketing, though, is around driving new customers in. For those customers who are online, whether it's using AI or social or search, looking for a bed, mattress, we need to be there and start to build the awareness that we do sell these products and we have great products to sell. And so what you see is... particularly online, a lot of more new customers. There's a percentage of our customers, 20%, who are buying a property, moving home. So if we then have a very successful direct marketing campaign, CRM campaign that says, if you've bought this product or you're in the market for that, sofa then actually we do sell beds and we can cross sell there and our marketing team has done a brilliant job on tapping into home movers so that's broadening the basket if you like of products so we do see using all the tools we have and the data we have the 100 million opportunity we see in the next few years as being a really valid opportunity to go after.

And then on the safer delivery company, I mean, it's good to see two wins there. Could you sort of give us an idea, without giving too much away, about sort of how lucrative that is and the economics of it and anything you can?

No. Nice try.

No, no, the serious point would be... Do you know what's fascinating? Self-delivery company, the big thing that they're selling is the customer service. So our cost to deliver, the price that we're offering third parties is uber competitive. But the thing that they really want is the customer service. And if you speak to the two CEOs of the brands that we're working with, they'll say they really, really value every single order that we deliver. We track it. We work with them. And so we're building our offer based on a differentiated customer service. We know that we can offer very good value. And therefore, for us, because we've already got the infrastructure costs in place and the capacity in place, the only cost to us is the variable cost of delivery. And obviously, we're charging a bit more. But I'm not going to go into the economics just yet. But it's an opportunity. And we have had quite a few people come to us. We want to get this right, build the infrastructure, get the technology right, create all the portals. And that's what we're working on now. But we do see it as a good opportunity.

Andy Wade from Jefferies. Three from me. The first one on volumes, we were positive in the first half. I think the implication is it's going to be slightly negative in the second half. Just interested in sort of why the, what's been behind the change in direction. Is it that your share gains are going to slow, that the market's going to be a bit worse, or, and that just the start to the period has been challenging. Therefore, that's going to be, that's the sort of the driver, because it's sort of in the bag to some extent. So that's the first one around volumes. The second one is it sort of sounds like the major risk around the supply chain piece is costs of surcharges, additional surcharges if they come through. Just based on what you've seen historically, and as you say, it's not your first rodeo, what you've seen historically, any idea of sort of magnitude. I mean, it's not going to be 10 or 15 million, but it's probably not 500,000, but interested in what sort of scale that could be. And then the third one, appreciate you've sort of answered Jonathan's questions in broad terms in the P&L side of things, but on home, just interested in terms of the drop through, right? Because you're talking about 40% plus in the core business, but the drop through, presumably it's nearer sort of the 10%. I don't know though, I'd be interested as to what the drop through on the home side of things is. Yeah, good questions.

The last two I can probably answer reasonably well. The first one is a bit more speculative. But I think on the supply chain costs, freight costs specifically, because of the routing that we go around, we go around the Cape, we don't necessarily see it. At this moment in time, we haven't seen any disruption and we haven't seen any surcharges coming through just yet. But there could be, and we do anticipate at some point, fuel surcharges coming. a few hundred dollars potentially, which we're aware of when we're talking to the shipping companies, we've got good relationships with them and we've got contracts in place. That'll be potential for next year, FY27, very immaterial for this year. I could possibly see a few hundred dollars, you're talking quick maths, two or three mil on gross margin, if that was for the full year and that was sustained for the full year, which none of us know. So that's probably the order of magnitude there, Andy. In terms of the home payroll drop-through, I would say it was probably close to double what you just said. If you think about a margin of mid-40s, 50s, knock off your variable costs and some marketing, there's no fixed cost to go against that. That's just a pure drop-through contribution. In terms of volumes, it's difficult. February was a washout, really. But was it just too much rain for people to come to the store? Who knows? I'm not going to get into that speculation. But I think what we've seen is it's not just our footfall. It was the traffic. So I think customers slightly put off in February for whatever reason. In terms of going forward, we've just extrapolated and said, OK, if we don't get February and March back, what does that mean for the rest of the half? And that's where we've come to the numbers we've come to. So we're not necessarily concerned by short-term trends. It's more stepping back and looking at the bigger picture.

And AOV's Andy remains strong. That part of the equation.

Thanks. Sorry, just one last follow-up on Ben's question. I may have better luck, we'll see. But on Sofa Delivery Company, we look at the spare capacity that exists within that. If we had to put the potential or the opportunity on a revenue number of how much of that spare capacity you would want to necessarily sell into third parties, what does that revenue opportunity potentially look like?

I'm not telling you. What I would say, let's be really, really clear, and we've been very clear with the board and all of our shareholders, the self-delivery company is an amazing asset, and its first priority is to serve DFS and Sophology. And we've got 20-odd CDC distribution centers around the country that deliver great customer service with great people. And we flex up and down throughout the year depending on the cycle of deliveries. A lot stronger in things like December when we're pushing for guaranteed Christmas. So we can flex up. And we also have great partnerships with what we call delivery partners. So we bring them in as we get higher deliveries. So we know what the capacity is that we've got spare. Clearly, that's a commercially sensitive conversation. But we know that the first priority is our own brands. But then we know we've got enough capacity to deliver really well for third parties. This year is all about learning, piloting, improving the service. And going forward, as we get into this, Wayne, we will give you more numbers. And you can ask us again in September.

In a capital light way.

In a very capital light way.

Can I just do one hopefully nice question to end on? It feels like the pace of innovation has actually increased in terms of product innovation and the collaborations you've got going on. Can we expect a similar sort of increased pace of innovation into the second half and into next year?

Yeah, I think you can, Caroline. And I have to compliment the commercial teams. They're an amazing... We get inundated with people wanting to work with us. And so... And we have really, really great supplier relationships where they'll bring new innovation to us that they're seeing around the world first. And we get the first dibs at that. And every quarter, every month, we're dropping new products. There's another nine products gone into Sophology this week. So we will keep innovating. I think in the end, in the end, it is about this is a fashion-led business and it's innovating and keep pushing, working with the brand. So we've had French Connection for many years, but we're refreshing the products within that range all the time. We've had Jules many years, but we're refreshing the products. So we've got established propositions, but within their NPD, super important. And then we launch, she's gone now, but Amanda Holden's range. And we're really excited about it. It's something very different. And so we're very careful about who we work with. But when we do, we really get behind that and try and drive a lot of NPD and awareness. So I think it's the lifeblood. It's the lifeblood of the business. I'm getting the thumbs up to say stop or that. I don't know. But anyway, thank you very much for your attention. Thanks for attending. And nice to see you all. OK, thank you. Thank you.